Chrysler Retreats from Europe

The smallest of the Big Three may become an ex-multinational

In the late 1950s and early 1960s Chrysler Corp., like many another U.S. company, transformed itself into a multinational: it built or bought plants from Turkey to Australia so that it could compete worldwide with GM and Ford. But in recent years the foreign operations have brought Chrysler more pain than profit, so now the financially beset smallest member of the U.S. Big Three seems well on its way to turning itself into something much rarer: an ex-multinational.

Last week Chrysler announced that it would sell its automotive subsidiaries in Britain, France and Spain to France's Peugeot-Citroen for $430 million in cash and Peugeot stock. If the deal is approved by the European governments involved--indeed, Britain may torpedo it --Peugeot would become the biggest auto manufacturer in Europe and fourth largest in the world, with sales right behind those of Chrysler itself. Chrysler would get out of the European market completely, except for its 15% share in Peugeot, thus shedding 70% of its foreign production and about a fourth of its worldwide output. Additionally, in the past year the company has sold operations in Argentina and Turkey to local investors; it is dickering to have Japan's Mitsubishi take over at least part of Chrysler Australia and has been trying to induce Volkswagen to buy part of Chrysler Brazil. Chrysler may sell some other Latin American operations too.

Why? In a letter to shareholders, Chairman John Riccardo and President Eugene Cafiero spoke of a need to concentrate the company's resources in North America. The point could be put more bluntly: Chrysler is so strapped for cash to spend at home that it can no longer afford aspirations to global power. Its share of the U.S. market has dropped to 12.8% this year, from 16.2% in 1970, and it must spend $7.5 billion over the next five years to expand and modernize its U.S. plants. It has no hope of financing those expenditures out of depreciation and retained profits--if indeed there are any profits. There will be none this year; though sales are likely to total $18 billion, industry analysts reckon that the company will wind up with a loss of around $120 million.

The sale to Peugeot will do nothing to reduce this year's losses--a fact that Wall Street was quick to appreciate. Although Chrysler's stock jumped after the announcement, it quickly fell back, closing the week at 12.5. But experts applauded the decision. Said Arvid Jouppi, a top Detroit analyst: "Chrysler's strategy is to become strong domestically and abandon the world market. I would rather have 15% of a strong company like Peugeot than overseas assets that were too heavy to bear."

Chrysler will collect $230 million in immediate cash, and $200 million in Peugeot stock that it could put up as collateral to get loans. Also, Peugeot will assume responsibility for $400 million owed to creditors by Chrysler's European units. Dumping that debt should improve Chrysler's credit rating, and thus its ability to borrow in the U.S.

Further, Chrysler will lessen what was becoming a severe drain. Its foreign operations lost almost $33 million last year. In Europe, only the French company that makes Simca cars was profitable. Plagued by low productivity and frequent strikes, Chrysler U.K. lost $20 million in 1977 and might drop twice as much this year, despite heavy subsidies that the British government has been paying to keep production going.

British Industry Secretary Eric Varley, who had negotiated the subsidies, was reported by aides to be "furious" about the Peugeot deal. He was disturbed partly by the suddenness of Chrysler's move, which was negotiated in deep secrecy with Peugeot officials headed by President Jean-Paul Payrare. John Riccardo broke the news in London only three days before the sale was announced. More important, the British fear that Peugeot will be tempted to shut down Chrysler U.K.'s plants, wiping out 23,200 jobs, and sell French-made cars through Chrysler's British dealer network. The government will probably approve the sale, however, subject to tough conditions: an end to the subsidies, an ironclad commitment by Peugeot to keep making cars in Britain, or both.

For Peugeot, the lure of the deal is simple: size. Peugeot has prospered since it began taking over ailing Citroen in 1974. Last year it earned $239 million on sales of $8.5 billion. But it is convinced that it must grow bigger still, because in the long run only European companies with volume comparable to the U.S. and Japanese giants will be able to survive international competition. The Chrysler deal will give it 18% of the West European market, and perhaps eventually a slice of the market in the U.S., where it sold only 10,000 Peugeots and no Citroens last year. Under an agreement with American Motors Corp., the French government-owned Renault firm will sell cars in the U.S. through A.M.C. dealers. It would only be logical for Peugeot to request the same service from its new shareholder, Chrysler.

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